Israel Military Industries loses Indian blacklist challenge

The Delhi High Court has dismissed the petition filed by Israel Military Industries (IMI) against the order of the Ordnance Factory Board (OFB) issued in March, last year, blacklisting the defense company from any dealings with the Indian government-run enterprise over allegations of corruption.

Justice Rajiv Shakdher ruled last Wednesday that ‘there is no merit in the writ petition and, therefore, it is, accordingly, dismissed’.

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Six companies, both Indian and foreign, had been recommended for blacklisting by the Central Bureau of Investigation (CBI) in 2010, following on from an earlier decision of the Ministry of Defense in 2009 to place all contracts with a mostly similar list of companies on hold, pending investigation of corruption allegations.

IMI had been selected by the OFB for partnership in setting up a factory in Nalanda, Bihar for the manufacture of Bi-Modular Artillery Charge (BMAC) systems (or Bi Modular Charge Systems – BMCS) for the Indian Army’s 155mm Bofors howitzers in project said to have been worth INR 1,200 crore in 2009 (around USD 200 million in today’s terms). Interestingly, IMI was selected after a previous contender, Denel of South Africa, was blacklisted.

Meanwhile, the defense ministry approved an OFB and Defense Research and Development Organization (DRDO) joint project to develop and produce these systems, indigenously, and in an unprecedented move, confiscated an INR 224 crore bank guarantee deposited by IMI in March, 2012 after it placed the Israeli company on a blacklist.

In January, 2011, the Indian Army also initiated a separate process for the acquisition of these systems when it issued a Request For Information (RFI) to identify vendors who could supply them.

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The Israeli company had submitted to the court that the blacklist order was against the principles of natural justice, claiming that the company was not provided the material basis of the charges of involvement in the allegations of corruption leveled against the former Director General Ordnance Factory Board, Sudipta Ghosh.

IMI also claimed that the order being challenged was passed by an authority separate from the committee that conducted the hearing, which was, evidently supposed to be a recommendatory body. It submitted that the person hearing the case ought to decide the matter, further claiming that neither the impugned order nor the committee’s report was reasoned, as it did not deal with the contentions raised by the petitioner and called the the conclusions of the order ‘pre-determined’, saying that the OFB and defense ministry sought requests for re-tendering the Nalanda project and went on to invoke the bank guarantees in issue, between August and September, 2011 even prior to the issuance of the order.

Justice Shakhder called these submissions ‘untenable’, ruling, “For the IMI to contend that there is breach of principles of natural justice, in as much as respondents have, according to it, failed to supply the underlying material, is in my view, unsustainable. It is not the case of IMI that the respondents had relied upon documents or material, in passing the impugned order, other than that which is extracted in the show cause notice dated 22.10.2010.”

He noted further, “It was also sought to be argued based on the judgment of a Single Judge of this court in R.K. Machine & Tools Ltd. case that the petitioner should be given the precise material which constitutes the basis for the decision. As is noticed above by me, IMI was not party to the said case. Nevertheless, the petitioners who had approached this Court in that case had filed their writ petitions at a time when only a FIR was lodged. Thereafter, since a chargesheet was filed, the respondents did issue a second show cause notice, which is the only material available with the respondents. This material was supplied in the form of an extract contained in the body of the show cause notice. Therefore, this argument advanced on behalf of the IMI is also misconceived and hence rejected.”

Justice Shakdher also ruled, “The respondents before blacklisting IMI, were duty bound to act fairly. Towards this end, admittedly, show cause notices were issued and opportunity was given to the representatives of the IMI, not only to make a written representation but also to present their case, in person, before a body whose inputs were sought by the OFB. Both, the written representation and the recommendation of the Committee were placed before the OFB. The OFB passed the impugned order after deliberating upon the same. There was, therefore, in my view, no breach of any principle of natural justice as alleged or at all.”

He clarified, “There is no requirement that irrespective of the circumstances, and the nature of inquiry at hand, every noticee should be granted an oral hearing. If this principle were to be applied, the fact that OFB did not grant the representative of the IMI an oral hearing, in my opinion, would not vitiate the impugned order. It would make very little difference, assuming it to be correct, that the representatives of IMI were not aware of the fact that the Committee was only a recommendatory body.”

IMI also said the decision to blacklist it for a period of ten years, was disproportionate to the charge levied against it, in light of its claims that it was in breach of the principles of natural justice, arbitrary, unreasonable, lacking application of mind, in pursuance of malafide intentions and against public policy.

Justice Shakdher ruled, “The court’s jurisdiction to interfere in the quantum of the punishment imposed, is very limited. The punishment accorded in a given case has contextual attributes which are best known to the decision maker. The courts can interfere only if the punishment is unconscionable. Having regard to the nature of the contract, which involves a project having implications for national security, in my view, no interference is called for. The submission is accordingly rejected.”

“The more important question is, is there anything to suggest, (which is the conclusion reached both by the Committee and the respondents), that IMI had used intermediaries to secure the BMCS project,” Justice Shakdher asked, before noting, “It is contended that it (IMI) has not used any intermediary to procure the BMCS project, as alleged or at all.”

“At this stage, what has to be seen is that, is there enough basis for the respondents to take a decision not to continue with the contract it entered into with IMI. The decision in this behalf would be entirely that of the respondents, i.e., the State. The courts under Article 226 of the Constitution can interfere only if it is a case where there is no material at all or is a case of breach of principles of natural justice or lack of jurisdiction. The adequacy of material does not fall within the scope of consideration of the court. The State is free to take the stand that it will not engage with IMI. Surely this Court, exercising equitable jurisdiction under Article 226 of the Constitution, will not interdict this decision of the respondents and force them to continue a relationship, which it seeks to terminate,” ruled Justice Shakdher.

He further noted, “The argument that these are only allegations and none of these allegations are linked to the petitioner, in as much as it is not named as an accused, cannot be fully grappled with in the midst of a trial. The material presently available with the respondents would, to my mind, provide “strong justification” for the respondents to say that it does wish to continue to deal with the petitioner. That such a decision of the respondents’ results in a collateral damage to the reputation of the petitioner, is an aspect with which the petitioner will have to live with, at least till the trial is over.”